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IRS Statutes of Limitation for Audits, Collections & Tax Refunds

IRS Statutes of Limitation for Audits, Collections & Tax Refunds

The Internal Revenue Service takes time to make sure your tax situation is up to date. The tax code allows the IRS three years to verify the tax return and ten years to collect the taxes owed. It also sets a deadline for you when you need to file the return if you want to collect any refund owed to you.

All of these limits are known as the IRS statute of limitations.

You usually have three years to claim a tax refund.

You have three years from the initial tax return date to claim the refund you are entitled to. The 2020 tax return expires on April 15, 2021, so you have until April 15, 2024, to file your tax return and still continue to receive any applicable tax refunds.

However, this period is extended by one year if you are late in paying your taxes. The limitation period is only two years from the payment date (if this date is later than the three-year period).

Your refund will expire and disappear forever if you wait longer than the deadline because the statute of limitations for soliciting a refund has expired.

Amended returns and extension of time to file

Amended returns that require additional refunds are within the original status of limitation; they must be filed within 3-years of the original due date. If you receive an extension to your return, the three-year limitation period begins when you file your taxes.

Exceptions to the 3-year refund rule

There are two important exceptions to the three-year refund limit:

  • Taxpayers have up to seven years to request a refund of non-performing debt or worthless securities.

  • The limitation period's three-year status does not apply in situations where taxpayers cannot manage their financial affairs due to a physical or mental disability.

What will happen to your refund if you don't collect it?

If you are qualified for a refund but do not request it within the statute of limitations, the federal government will withhold the money. This is regarded as an "excess collection" in IRS terminology. This cash refund cannot be sent to the taxpayer or be applied as a payment for a future fiscal year.

IRS has three years to verify your tax return

The clock on a three-year statute of the limitation period for audits begins from the tax due date. This deadline applies to most situations. In 2021, it will be April 15, 2021. Therefore, even if you file in March 2021, the IRS has until April 15, 2024, to initiate an audit.

If you request an extension of the filing period, the IRS will have three years from the date you file your request. If you file in July, for example, the three-year clock starts counting in July.

Most state tax agencies work with the federal three-year period for reviewing tax returns, but some states have longer requirements.

Exceptions to the three-year audit rule

There are also exceptions to the federal three-year rule on assessments and audits:

  • The IRS has six years from the filing date to verify a tax return and assess additional taxes if the taxpayer omits income higher than 25% of what is declared on the tax return.

  • The IRS also has six years to verify a tax return and assess additional income tax on undisclosed foreign financial assets if the missed income exceeds $5,000.

  • The statute of limitations for other tax assessments and audits may remain open indefinitely if the taxpayer submits a false or fraudulent tax return.

IRS has ten years to collect any unpaid tax debt

The 10-year period for collecting outstanding debt is measured from the day a tax liability is finalized, which can be done in several ways.

 Your liability may be considered finalized because it is the amount of tax entered on a tax return that you have filed because it is an assessment of additional tax resulting from an audit or because this is a proposed assessment that has become final.

The IRS has ten years to collect the full amount from the day the tax debt ends, plus fines and interest. The remaining balance will disappear forever if the IRS does not collect the full amount within ten years because the statute of limitations has expired.

The statute of limitation can be suspended.

The 10-year statute of limitation may be suspended in the following situations:

  • While the IRS is considering an offer in compromise, installment payment agreement, or request for innocent spouse relief

  • While the taxpayer is subject to the automatic suspension of bankruptcy protection, plus an additional six months

  • For periods when the taxpayer has lived outside the United States for at least six months

This suspension means that the clock stops working during these periods. For example, it may take a month for the IRS to assess your down payment request to pay a tax debt. In this case, the 10-year limitation period is pushed back by 30 days.

Using deadlines to plan your taxes

It is in your best interest to file your tax return as soon as possible. First, you can request any refund due. Second, the clock begins with a three-year statute audit and a ten-year collection statute.

Exclusive planning opportunities are available to a taxpayer if multiple tax years are involved, as refunds that are still authorized within three years can be used to pay other tax debts owed by the IRS or applied to estimated taxes for the current year.



Dennis Jao
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